Simmons says: Scariest market since 73
Major Business News
OPEC May Boost Production
For the Third Time This Year
By THADDEUS HERRICK and BHUSHAN BAHREE
Staff Reporters of THE WALL STREET JOURNAL
OPEC ministers next week are expected to boost crude-oil production for the third time this year, but the increase still isn't expected to be enough to bring down gasoline and heating oil prices.
Members of the Organization of Petroleum Exporting Countries are expected to raise production by as much as 800,000 barrels a day, an acknowledgment that the world needs more crude oil to meet demand. But in discussing a relatively modest increase, rather than one big enough to truly reduce prices, the group is sending a message that it won't shoulder the blame for the most severe energy crunch in many years.
Instead, OPEC members and some analysts say today's prices also reflect high U.S. fuel taxes and a reluctance by refiners to stock up at current high prices. As a result, they say, refined products such as gasoline and heating oil are more costly than current crude prices would indicate.
Anticipating that OPEC's moves won't be enough to relieve a tight market, the benchmark West Texas intermediate crude oil Wednesday leaped $1.07 to $34.90 a barrel. Prices now are at a 10-year high, even above levels reached before OPEC met last March.
"This is the scariest market we've been in since the summer of 1973," said oil analyst Matthew Simmons, president of Simmons & Co., an investment-banking firm in Houston. "I don't know how we're going to get out of the mess we're in."
Big Rise in Output Needed
Analysts say prices will come down only if OPEC raises production by one million barrels a day or more. OPEC members, excluding Iraq, currently are producing an estimated 26 million barrels of oil a day, well above the quota of 25.4 million barrels set in June. (Iraq isn't part of quota arrangements because its exports are still regulated by the United Nations.) As a result, an increase of 500,000 barrels a day in the quota would only legitimize current overproduction.
Since most OPEC countries are producing as much as they can, any significant increase would have to come largely from Saudi Arabia, the only OPEC country with considerable spare capacity. But the Saudis seem unlikely to take sole responsibility for bringing down prices.
The latest evidence: Saudi Arabia's Crown Prince Abdulla said Tuesday night that, while the Saudis want to stabilize prices, consumer countries must reduce fuel taxes.
"These taxes, which bear heavily on consumers, should be reconsidered," Mr. Abdulla told American businessmen at a reception in New York.
The Crown Prince was expected to meet with President Clinton Wednesday to discuss oil prices and OPEC output plans.
Saudi Arabia doesn't want prices so high that they crush the Asian recovery or slow the U.S. economy. Though analysts say Saudi Arabia would prefer prices in the $25-a-barrel range, the Saudis seem to be betting that the world economy can sustain oil at more than $30 a barrel.
Asian Slowdown
Still, oil analysts say they are beginning to see a slowdown in the Asian economy. Not incidentally, finance ministers from member countries of the Asia-Pacific Economic Cooperation Forum intend to send a message to OPEC by putting oil prices on the agenda at a meeting this weekend.
Saudi Arabia and its OPEC peers also clearly remember what happened when Saudi Arabia and Venezuela, jockeying for market share, urged OPEC to boost production in 1997, just as the Asian economy was tumbling. The move created a glut and prices fell to as low as $11 a barrel. This time, however, Venezuela is playing an increasingly hawkish role, while Saudi Arabia, has opted to "lag, not lead; react, not anticipate," according to Larry Goldstein, president of the Petroleum Industry Research Foundation in New York.
In the meantime, consumers around the world are growing impatient. In France, truckers protesting high oil prices blocked refineries for a fourth day Wednesday, creating gasoline shortages, and similar protests look likely in Belgium. In Spain, truck drivers joined farmers in organizing a boycott of Repsol, the Spanish oil company.
While U.S. consumers have groaned at relatively high gasoline prices, analysts say a spike in the cost of heating oil and possible shortages this winter will likely mean a good deal more discontent to come. "The market is tight as a drum," said Mr. Simmons.
However, economists say the economy is fundamentally changed from that of the 1970s, when oil spikes triggered inflation and ultimately recession. For one thing, oil is less central to today's economy. What's more, oil-price spikes then were seen as permanent, with OPEC controlling the market. Today, prices fluctuate in part because OPEC's ability to manage the oil market has lessened. Meanwhile, the booming economy has allowed consumers and fuel-sensitive industries, such as the airlines, to absorb oil-price spikes. |
